Xiao Ming was especially happy and decided to ask your opinion on the choice of his company vehicle. He narrowed down his choices to two cars, Tesla Model S and Mercedes-Benz CLS. Once the choice is made, assume the company keeps buying the same type of car as soon as its useful life is over. Also Xiao Ming thinks these two cars give him the same level of pleasure, thus it all depends on the annualized cost of the car. ~ 4 ~ The Tesla Model S costs $100,000 initially, the operating expenses total to $15,000 per year and has a 4- year life, after which it will sell for $15,000. The Mercedes-Benz CLS on the other hand costs $85,000 initially, the operating expenses total to $17,500 per year and has a 3-year life after which it will sell for $10,000. The CCA rate is 40%, and you assume a required rate of return of 12% in this case.

What are the EAC of these two cars while taking Tax and CCA tax shield into consideration? Which car should you recommend to Xiao Ming based on your findings?

Answer rating: 100% (QA)

To calculate the Equivalent Annual Cost EAC of the Tesla Model S and the MercedesBenz CLS we need to ... View the full answer